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Ken Griffin, the head of multi-billion dollar investment fund Citadel, has said regulators should focus on banks instead of hedge funds in seeking to protect the financial system against risks stemming from debt-fuelled arbitrage trading of U.S. government bonds.
In an interview with the Financial Times, the investment chief hit out at the U.S. Securities and Exchange Commission’s plans to subject hedge funds to increased oversight, by treating them more like the broker-dealer arms of banks when it comes to the basis trade.
The basis trade refers to profiting on the slim arbitrage gaps between the immediate price of U.S. Treasury bonds and the value of the same assets on futures markets. These trades are funded by big borrowing involving more than 100 times leverage.
Related: Bank of England warns of risks from big hedge-fund bets against Treasury bonds
“If the SEC recklessly impairs the basis trade, it would crowd out funding for corporate America, raising the cost of capital to build a new factory or hire more employees,” Griffin said. “It would also increase the cost of issuing new debt, which will be borne by U.S. taxpayers to the tune of billions or tens of billions of dollars a year.”
Griffin suggested an alternative. “The SEC is searching for a problem. If regulators are really worried about the size of the basis trade, they can ask banks to conduct stress tests to see if they have enough collateral from their counterparties.”
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